Earthquake in Japan rattles U.S. investors

Mar 20, 2011 @ 12:01 am

By Lavonne Kuykendall

As the crisis in Japan continues to unfold, some worried U.S. investors have turned to their financial advisers for reassurance that the market won't suffer a 2008-like decline.

“Since the earthquake happened, our phones have rung more than at any other time since last year's flash crash,” said Philip J. DeAngelo, owner and managing director of Focused Wealth Management LLC. “People want to know if this is the end of the global recovery.”

The earthquake and tsunami that hit Japan on March 11 killed thousands and leveled entire cities along the country's northeast coast. Damage to nuclear-powered electrical-generation plants only added to fears when significant levels of radiation were detected following a pair of explosions last Tuesday.

An early estimate by AIR Worldwide Corp. forecasted insured property losses of up to $35 billion for the earthquake alone.

Some advisers have issued commentary about the crisis or talked to clients about their portfolio's exposure to the catastrophe.

Most of the calls focus on how well the diversified-portfolio approach held up under conditions no one could have predicted, said Matt Lynch, president and chief executive of Capital Analysts Inc., a broker-dealer that works with about 350 advisers managing $8 billion in assets.

“They want to know our team is on top of it,” he said.

Last Monday, Capital Analysts put out a commentary on the Japanese exposure of its funds and investment models, and issued updates, which Mr. Lynch said the company does on a regular basis after major events.

At Edelman Financial Services LLC, where less than 1.5% of client assets are invested in Japan, advisers “are in extensive contact with clients, telling them our analysis and expectations,” said chairman and chief executive Ric Edelman. “We believe that the market will overreact as it typically does on news of this type,” he said.

LITTLE PANIC

Generally, investors aren't panicking, but they are expressing concern, said Walter Todd, principal of Greenwood (S.C.) Capital Associates LLC.

“We've definitely had some e-mails and calls,” he said.

The news media tend to overplay catastrophe stories, and it falls to investment advisers to “give a balanced response, unlike the news media,” Mr. Todd said. He called the swift fall in the value of Japan-related investments “way overdone,” and said that the drop creates some buying opportunities.

Shortly after the earthquake hit, Glassman Wealth Services sent an e-mail to all clients outlining the firm's investment exposure to Japan. About a half dozen clients called to get specifics on their exposure, said Barry Glassman, president of the firm, which has $450 million in assets under management.

“More clients than not have asked if this is a buying opportunity,” he said.

Mr. DeAngelo said the unprecedented nature of the crisis is driving the concern.

“It is like Hurricane Katrina with Three Mile Island on top,” he said.

In terms of property damage, 2005's Hurricane Katrina was the most expensive natural catastrophe ever recorded, with more than $125 billion in losses. Earthquake and tsunami losses in Japan are likely to exceed that figure.

The 1979 accident at the Three Mile Island nuclear power plant near Middletown, Pa., was the most serious in the history of U.S. commercial nuclear power plant operations. Although the TMI accident was far less serious than the problems facing Japan, the type of event is similar — a partial meltdown of the plant's nuclear reactor caused by a loss of cooling water.

Not all advisers reported unusual client concern over the past week.

Jim Williams, investment manager and chief compliance officer at investment adviser Creative Planning Inc. called client response “relatively muted.”

“I've had one person call, but he was concerned before Japan started,” Mr. Williams said. The Japan crisis only “broadened” his concerns.

If clients were to call, Mr. Williams said that he would tell them that unforeseeable events such as the Japan tragedy are the reason the firm allocates the way it does, putting together portfolios beforehand so that when unexpected events occur, investors aren't overexposed.

Brian Conroy, a financial adviser with Savant Capital Management Inc., said that he has received only a few e-mails and calls about Japan, which he attributes to limited exposure to the country in the company's investment portfolios.

“The first question is, "How exposed am I?'” Mr. Conroy said, adding that that would be the response to almost any catastrophe.

“Anytime an event of this magnitude hits, the short-term impact is always excess volatility because of the uncertainty,” he said. “This is certainly something the global economy will move past, and while it will represent a significant challenge for Japan, it is not insurmountable.”

A jump in the stock price of U.S. construction giant Caterpillar Inc. Ticker:(CAT) appears to be an example of both the long- and short-term impact of the disaster in Japan.

“There's a huge increase potential in construction firms and heavy-equipment companies,” said Robert K. Haley, president of Advanced Wealth Management, which manages $100 million in assets.

Advanced Wealth owns stock in Caterpillar, Deere & Co. Ticker:(DE) and General Electric Co. Ticker:(GE), the latter of which Mr. Haley believes is a good value currently.

GE's stock plummeted last week on news that the GE-designed reactor at the Fukushima nuclear power plant had failed. On Friday, GE shares closed at $19.25, down 5.5% over the five trading days, but up 6% for the year.

Still, GE — which includes construction and water treatment in its portfolio of businesses — will play a critical role in the rebuilding in Japan and thus could be a good investment right now, Mr. Haley said.

“We believe there is excellent long-term potential here, with some short-term risk,” he said.

Jessica Toonkel contributed to this story.

E-mail Lavonne Kuykendall at lkuykendall@investmentnews.com.

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